HC Deb 04 April 1960 vol 621 cc54-9

I have a number of proposals in the Inland Revenue field. I will deal, first, with those designed for the protection of the Revenue.

POST-CESSATION RECEIPTS

The first concerns particular types of what are called post-cessation receipts. Decisions of the courts in the cases of the late Mr. Leslie Howard and the late Mr. Peter Cheyney have established that under present law certain receipts of the nature of royalties coming in after a profession has ceased are not liable to Income Tax. The court decisions apply to cases where a profession has ended for reasons other than death, and the position is being exploited by some taxpayers to secure freedom from tax on their earnings.

The Royal Commission recommended that there should be legislation to close the gap revealed by the Leslie Howard case and I propose accordingly to provide that receipts of the kind I have described should be made liable to tax notwithstanding that they come in after the profession has actually or nominally ceased. There will be due allowance for any relevant expenses or unrelieved losses.

Mr. Harold Wilson (Huyton)

Does that include lawyers?

Mr. Amory

It is a different kind of case, as I think the right hon. Gentleman will realise when he sees it in the Clauses of the Finance Bill.

COMPENSATION FOR LOSS OF OFFICE

My next proposal concerns payment to retiring directors or employees. I have particularly in mind large payments made in the last few years to directors who have ceased to hold office on the occasion of take-over bids. Such payments may represent both a deductible expense for the company that pays them and a tax-free benefit to the recipient. Moreover, as the Royal Commission pointed out, there are cases in which, to use its own words: what is ostensibly a payment in compensation for loss of office is sometimes used merely as a cloak for additional remuneration".

I have had the whole question of these terminal payments thoroughly examined. It is by no means an easy subject.

Following the Royal Commission, I propose to bring within the tax charge voluntary payments at the end of employment and all payments described as compensation for loss of office, but to exclude reasonable lump sum payments in the nature of superannuation benefits. I shall also exclude payments arising from physical injury, certain payments made by Government or local authorities, and redundancy payments of limited amount.

HOBBY FARMING

My next proposal concerns losses in farming and certain other activities. As the Committee knows, attention has been focussed lately on the continuous losses incurred by some so-called hobby farmers. As the law stands the revenue suffers by having to repay the tax on other income equivalent to the loss, and the Royal Commission on the Taxation of Profits and Income advised that action should be taken.

I propose that loss relief in respect of farming losses—or, indeed, any other trading losses—shall be admitted if, and only if, the activities are carried on "on a commercial basis and with a reasonable expectation of profit". I am sure this is fair. It will not adversely affect genuine farming at all. I believe, in fact, that the genuine farming activities carried on by those who also have other occupations in many cases bring benefit to the farming industry.

This new provision will operate as respects loss claims for the year 1960–61 and subsequent years. My proposal will, therefore, give those who may be affected notice of the basis for dealing with loss claims in respect of the Income Tax year that starts on Wednesday. They will be able, if they are so minded, to start at once to put their affairs on to a commercial basis and if they can show the General Commissioners, next April, that they have done so they should not be adversely affected by the new provision.

OTHER CLAIMS FOR LOSS RELIEF

With the foregoing proposal about losses I associate another. There is in the Income Tax code, Section 142 of the Income Tax Act, 1952, another provision which enables a loss in one trade to be set against the profits of another trade carried on by the same person. Section 142 has, I regret to say, been used for tax avoidance purposes. Because of the special rules for assessment in the early years it is possible for a loss incurred at the outset of a new business to be set against the profits of another business two or nearly three times over—a possibility, as the Committee will realise, extremely painful to me. The needs which Section 142 was designed to meet have since been met by other provisions for the relief of losses either by set-off against income of the year of loss or by carry-forward. I therefore propose the repeal of Section 142.

DEDUCTION OF TAX BY THE CROWN

My next proposal is to deal with the difficulties which flow from the judgments of the House of Lords in the case of Whitworth Park Coal Co. v. Commissioners of Inland Revenue. Their Lordships took the view that the Crown was not authorised to deduct tax from certain income payments made to former colliery companies under the Coal Industry Nationalisation Acts. These payments were made and accepted on the basis that they were legally subject to deduction of Income Tax. If they had been made without deduction of tax and taxed by direct assessment the companies would have been in very much the same position as they were after tax was deducted at source. I understand, however, that a number of companies have issued writs against the Ministry of Power claiming repayment of the amounts originally deducted on account of tax. If these claims were to succeed the companies would make an unjustified and wholly unexpected profit at the public expense, because with the passage of time the earlier payments would escape Income Tax. I propose, therefore, to provide in the Finance Bill that the law shall be what, before this case, it was assumed by all to be. Thus, tax deductions made by the Crown from these payments will be validated retrospectively for all purposes, including the purposes of any legal proceedings already instituted.

DIVIDEND STRIPPING

I now come to a particularly serious matter. I have hitherto been reluctant to contemplate a general provision against tax avoidance by transactions in stocks, shares and securities. My predecessors and I have endeavoured to deal with dividend strippers and bond-washers by legislating against specific devices as they came to notice. But fresh devices involving the manipulation of stocks and shares with the object of depriving the Revenue of its proper tax, I am sorry to say, have come to light recently. Moreover, safeguards that were introduced in earlier legislation to protect legitimate business are being twisted for the purpose of avoidance. Experience of the development of these objectionable activities drives me to the conclusion that any provision which is limited in its application is carefully studied in order to find a new way of cheating the Inland Revenue. I have, therefore, reluctantly reached the conclusion that we must take rather wider powers.

I propose, therefore, the introduction into the Income Tax code, as regards transactions in stocks, shares and securities, of a general provision against avoidance corresponding broadly to what we already have for Profits Tax. In substance, my proposal is that where any transaction in stocks, shares or securities appears to have been arranged with the object of securing an Income Tax or Surtax advantage, the Commissioners of Inland Revenue shall be empowered to give a direction or directions in order to nullify the tax advantages that would otherwise be gained. Such a direction might provide for making an assessment or denying a claim to repayment or for the recomputation of tax liabilities to suit the demerits of any particular scheme.

I shall, of course, provide for the exclusion of bona fide commercial transactions not entered into with the object of securing a tax benefit. Similarly, transactions which can be shown to be no more than genuine investments, transfers or changes in the portfolio of individuals will be excluded. There will be a right of appeal to the Special Commissioners of Income Tax and from them on any point of law to the courts.

The prevention of these devices is in the interests not only of the Revenue, but also of the great body of fair-minded and honourable businessmen. I hope that I shall have the support of the whole Committee in putting into effect the provisions which I propose.

OTHER TAX AVOIDANCE

I must also propose further specific measures against avoidance that could hardly be dealt with by this general provision. First, there is a device under which financial operators purport to sell stocks, cum dividend, through the Stock Exchange, when they have no title to receive a dividend themselves. These transactions can lead to heavy revenue loss, though the persons who purchase cum dividend may be blameless.

Secondly, there is a device under which the persons in control of a company arrange that when that company has almost completed a project which in the ordinary course would lead to a taxable trading profit, the shares in it are sold so that the accrued profit, in effect, reaches the shareholders in the form of capital appreciation rather than income.

Thirdly, certain types of transaction have come to our notice, in which, by switching investments between financial dealing concerns and investment holding concerns that are under the same control, the proper tax on the profits of dealing is avoided and, in effect, the profits are taken in the form of capital appreciation. I shall bring forward in the Finance Bill specific provisions to cover all these matters.

INCOME TAX PENALTIES

A subject which has been much discussed in connection with a case that reached the House of Lords is that of Income Tax penalties. We have now completed a review of these penalties and I shall introduce the provisions for the changes which I recommend in the Finance Bill.

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